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Leanne Macardle

Editor

Published: 23/05/2019

Equity release can be a great way for older homeowners to give their retirement income a boost, allowing them to release cash tied up in their home without needing to downsize. But just what are these later life borrowers doing with all that extra money? Well, even though many use it to fund home improvements, holidays or simply to enjoy a comfortable standard of living, research from Key shows that many are also using their housing wealth to clear debts.

Downsizing is becoming an increasingly popular way for many older homeowners to release cash from their home, while at the same time allowing them to move into a smaller, more manageable property. Yet unfortunately, new research shows that they may end up with less than they bargained for, as after the various costs of moving have been taken into account, the money left over may not be as substantial as they initially hoped.

That’s according to research from OneFamily, with its latest figures revealing that 43% of over-60s surveyed have moved to a different property in order to access capital tied up in their home – yet 24% of those end up with less money than expected, and 20% were disappointed with the overall return.

Retirement may be the time that many people long for, but it can also be a risky undertaking, with various potential threats blocking your path to a stress-free post-work life. So just what are the risks you need to be aware of, and how can you avoid them? We take a look at a few things you need to bear in mind.

Deciding how to secure an income from your pension pot will be a key part of retirement planning, yet unfortunately, it seems that not everyone is giving it the attention it deserves. Indeed, research from Zurich suggests many retirees are entering drawdown with no planning whatsoever, and instead are relying on luck and guesswork when it comes to deciding how much to withdraw each year.

Lack of forward planning

The research found that just a third (34%) of retirees in drawdown calculated how much income they'd need to generate from their pension pot before they retired – the same proportion worked out how much they'd need to cover living expenses and how long they'd need their money to last, while just 22% calculated how much they'd need to fund leisure activities – which means the majority aren't even taking basic steps to work out how much they can afford to take from their pot.

This means a worrying proportion of retirees are at risk of draining their pension savings too early, a concern compounded by the fact that very few think about where they'll continue to invest their drawdown funds during retirement. Just 16% decided where they'd invest their funds to achieve their desired income, for example, and only 17% thought about the strategy they'd use to withdraw that income, such as selling shares or living off the dividends.

Future-proof your finances

It appears that many retirees are leaving the fate of their financial future to guesswork, and Zurich is instead urging people to make sure they have a suitable plan in place well before they move into drawdown. This includes researching drawdown providers, thinking about how much you'll be spending in retirement and how long you'll need your funds to last, calculating how much income you can afford to withdraw each year and considering the kind of funds you'll invest in, and of course, seeking suitable advice is key.

"Many retirees in drawdown are relying on blind luck to make their savings last throughout retirement," said Alistair Wilson, Zurich's head of Retail Platform Strategy. "But by taking simple steps to work out how much they can afford to take from their pot, savers can avoid withdrawing too much, too soon. Setting a sustainable level of drawdown income in drawdown can be something best done by speaking with a financial adviser, or getting free guidance from Pension Wise."

What can you do?

As Alistair Wilson noted, taking the time to work out how much you can take from your pot – bearing in mind things like day-to-day living expenses, life expectancy, investment strategy and additional expenditure – is key. This could of course be tricky to achieve on your own, so make sure to seek advice to ensure you stand the best possible chance of securing the income you need throughout your retirement.

What next?

If you're approaching retirement and still have an interest-only mortgage you're not sure how you'll pay off, you now have another option to consider – taking out a retirement interest-only mortgage. A possible alternative to equity release and a way to clear your current mortgage debt without needing to downsize, a retirement interest-only (RIO) mortgage works in a similar way to traditional interest-only deals, so is now the time to consider one?

Clear your interest-only mortgage

Last year, the Financial Conduct Authority estimated that there were some 1.67 million full interest-only and part-repayment mortgages outstanding in the UK, and many of those – an estimated 81,400, according to previous predictions from the regulator – are due to mature this year. This may not be a problem for those who know how they're going to repay the capital, but those without such a plan may be in for a worrying few months.

Previously, the options for such borrowers were fairly limited; many will be over the age of 60, and remortgaging in retirement used to be all but impossible given strict affordability rules, which meant many were faced with the prospect of losing their homes. Now however, the rules have been relaxed, and RIO mortgages are becoming increasingly common.

Could such a mortgage be for you?

RIO mortgages allow homeowners to remortgage their existing loan under similar terms to their current arrangement, meaning they only need to repay the interest for the term of the loan – which can be a lot more achievable for those on a pension income. Then, when the borrower dies or goes into care, the property will be sold and the mortgage repaid.

However, even within this area, providers are becoming increasingly flexible. In the months since such loans have been widely available – it was only in April last year that the regulator relaxed the rules and separated RIO mortgages from equity release, and widened the appeal of such loans in the process – numerous providers have got in on the action and are offering a wide range of options, with some allowing borrowers to repay part of the capital as well (thereby leaving more of an inheritance to loved ones) and others offering set repayment dates.

Many big-name lenders now offer these mortgages, giving peace of mind to those who would prefer to borrow from a high street bank or building society. This includes Post Office Money and Leeds Building Society, while Nationwide began trialling such products in November, and there are plenty available from smaller mutuals as well (such as Marsden, Vernon, Bath, Mansfield, Family and Scottish Building Societies).

Ultimately, RIO mortgages could be a great option for those unsure how they're going to repay their interest-only mortgage debt, but as with any financial decision, getting the right advice is essential. You can speak to our adviser partners at Premier Financial Group to get started, and see if you should consider this later life borrowing solution.

Downsizing is becoming an increasingly popular way for many older homeowners to release cash from their home, yet unfortunately, after the various associated costs have been taken into account, many end up with less than they bargained for.

Downsizing is an increasingly popular way for many older homeowners to release cash from their home, yet unfortunately, many end up with less than they thought.

Retirement may be the time that many people long for, but it can also be a risky undertaking, with various potential threats blocking your path to a stress-free post-work life. So just what are the risks you need to be aware of, and how can you avoid them? We take a look at a few things you need to bear in mind.

Retirement may be the time that many people long for, but it can also be risky, with various potential threats blocking your path to a stress-free life.

Deciding how to secure an income from your pension pot will be a key part of retirement planning, yet unfortunately, not everyone is giving it the attention it deserves, with many retirees entering drawdown with no planning whatsoever.

Deciding how to secure an income from your pension pot will be a key part of retirement planning, yet unfortunately, not everyone is giving it the attention...